Microsoft's Android Royalties Could Outpace Windows Phone Sales

Microsoft could profit enormously from its Android royalties strategy, to the point where that revenue stream outpaces that of Windows Phone.

Every Ahab
needs his Moby Dick, every Batman his Joker. To that list of opponents who
can't exist without the other, perhaps add Microsoft and Google Android.
According to a
new research note from Jack Gold, founder and principal analyst of J. Gold
Associates, Microsoft's claims that Android violates its patent portfolio could
result in a revenue stream that dwarfs anything the company can collect from
its own Windows Phone franchise.

Gold estimates
some 12 million Windows Phone units sold per year, which at an average of $15
in licensing per device translates to an annual $180 million. Compare that to
the $660 million to $1.1 billion in ActiveSync royalties on an estimated 140
million Android phones and 80 million iPhones, plus another $700 million from
Android patent royalties, and Microsoft theoretically wins, whether or not
Windows Phone dies with a whimper.

"This is not
guaranteed," Gold wrote in his July 11 research note, "given [Microsoft] has
not yet signed licenses with many of the vendors and some vendors in emerging
markets may not care if they are infringing. But even if Microsoft only
generates half this amount, it's a substantial sum. The OS revenues look paltry
by comparison to potential IP revenues."
Moreover, he
believes that Microsoft will gain some traction from its recent agreement with
Nokia, which will see Windows Phone ported onto the latter's devices. That could
increase Microsoft's market share to 15 percent over the next three years.
Whether or not
Gold's numbers prove accurate, Microsoft certainly sees a competitive advantage
in pursuing Android royalties. According to a July 6 Reuters report, Microsoft is demanding
that Samsung pay $15 in royalties for every Android-based smartphone the latter
produces.
HTC has also
agreed to pay Microsoft royalties for Android, along with a host of small
companies, including Wistron Corp, Onkyo Corp., Velocity Micro and General
Dynamics Itronix. However, not all companies seem quite so willing to pay up;
both Motorola and Barnes & Noble have decided to push back against
Microsoft with lawsuits of their own.
Microsoft's
Android push also comes just as recent reports suggest the company's smartphone
market share is trending downward.
For the
three-month period between the end of February and the end of May, comScore
estimated Microsoft's U.S. share dipping from 7.7 percent to 5.8 percent. If
accurate, that comes despite the marketing push behind the Windows Phone
platform.
During the
same period, adoption of Google's Android platform rose from 33 percent to 38.1
percent, while Apple enjoyed a slight uptick from 25.2 percent to 26.6 percent.
Research In Motion continued its market slide, declining from 28.9 percent to
24.7 percent.
During a July 11
keynote speech at Microsoft's Worldwide Partner Conference in Los Angeles, CEO
Steve Ballmer described Windows Phone's market presence as "very small."
Nonetheless, he went on to insist that other metrics boded well for the
smartphone platform, which Microsoft is counting on to counter the competitive
threat posed by the likes of Google Android, Apple's iPhone and Research In
Motion's BlackBerry franchise.
Follow Nicholas Kolakowski on Twitter

Nicholas Kolakowski is a staff editor at eWEEK, covering Microsoft and other companies in the enterprise space, as well as evolving technology such as tablet PCs. His work has appeared in The Washington Post, Playboy, WebMD, AARP the Magazine, AutoWeek, Washington City Paper, Trader Monthly, and Private Air. He lives in Brooklyn, New York.